Gary Shilling: S&P 500 Operating Earnings Could Plunge 20%

Shilling said there’s nothing else except consumers that can really hike the U.S. economy. Consumers have been on a mini-spending spree, while incomes have not kept up.

The key to consumer spending is employment, according to Shilling. He said it looked like employment was picking up, but “the employment report we got last week throws cold water on that.”

Shilling added that consumers now have a lot of reasons to save versus spend. They need to rebuild their assets and save for retirement while the equity in their homes has declined.

If consumers retrench there is nothing left to hold the economy up, by Shilling’s estimation.

When asked about his forecast of $80 of operating earnings on the S&P 500 (a big drop from the consensus $102), Shilling said foreign earnings were under pressure from the unfolding recession in Europe, the dollar was stronger, and there was a possibility of a hard landing in China, which means we could see a moderate recession led by consumer retrenchment.

Shilling said he was long Treasuries, short stocks, short commodities, and long the dollar. Shilling admitted the U.S. was the best of a bad lot, or “the best horse in the glue factory.” But that doesn’t mean stocks are a good choice, with cash being a reasonable alternative.

Shilling said his favorite was 30-year Treasuries where he sees the yield falling to 2.5%, while he feels it’s possible the yield on the 10-year Treasury yield could fall to 1.5%.

When asked if he was getting flack for his view on Treasuries, Shilling said “of course,” while pointing out he began recommending them back in 1981 when the yield was 15.21%. All the way down in yield, and up in price, the herd has been saying yields can’t go lower for 30 years, according to Shilling.

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